Beazer Homes USA Inc (BZH) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Beazer Homes earnings conference call for the quarter ended December 31, 2012. Today's call is being recorded, and will be hosted by Allan Merrill, the Company's Chief Executive Officer. Joining him on the call today will be Bob Salomon, the Company's Chief Financial Officer, and Carey Phelps, the Company's Director of Investor Relations.

At this time I will turn the call over to Ms. Phelps for the opening remarks. Ms. Phelps?

Thank you, Marianne. Good morning, and welcome to our call this morning highlighting our financial results for the quarter ended December 31, 2012. Hopefully by now you have seen our 10-Q, earnings press release, and the PowerPoint slides that typically accompany our earnings calls. These materials are available on the investor page of Beazer.com. Because of the amount of time that has elapsed since we released this information, we will devote most of our time today to answering questions.

Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Such risks, uncertainties, and other factors are described in our SEC filings, including our annual report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made. And except as required by law, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Joining me today are Allan Merrill, our President and Chief Executive Officer, and Bob Salomon, our Executive VIce President and Chief Financial Officer. I will now turn the call over to Allan for some brief prepared remarks.

Good morning, and thank you for joining us. Let me start by apologizing to our investors and analysts for the change in timeline related to this call. We understand that you have many other time commitments, and appreciate the difficulties created by us moving things around. We hope you will agree that our ability to further enhance our balance sheet earlier this week was worth the inconvenience. As Carey said, I will make a few comments to touch on the first-quarter highlights. But we'll use the majority of time to respond to questions.

The first quarter represented very good progress on our path to profitability. We were able to report year-over-year improvements in virtually every major financial metric, including revenue, gross margins, SG&A, and adjusted EBITDA. These results stem from both an improving housing market and our improving internal operations. For the quarter, we generated $7.7 million in positive adjusted EBITDA, up $3.9 million from last year. We recorded 932 new home orders, an increase of 29%, driven by improvements in absorption rates and a significantly lower cancellation rate. We closed 1,038 new homes, up 20%. We ended the quarter with a backlog that was 39% higher in units, and 52% higher in value, than at the end of the first quarter last year.

We increased gross margins in all three of our operating segments. We invested $90 million in land and land development. And we maintained substantial liquidity, ending the quarter with $397 million in unrestricted cash. Subsequent to the end of the quarter, we completed a refinancing of our 2015 senior notes, shifting that maturity all the way out to 2023, with only a nominal increase in interest expense. At this point, we have less than $200 million in debt coming due in the next five years, allowing us plenty of runway to invest in the emerging housing recovery.

Before turning the call back to the operator, I want to quickly run through where we stand on our four path-to-profitability strategies. This is our self-administered report card and, frankly, I'm encouraged by the results so far. In particular, we made demonstrable progress on three of our four strategies this quarter. For the four quarters ended December 31, we averaged 2.5 sales per community per month. And we had 86% of our communities performing. This improvement in absorption rates and the performing community ratio has resulted from better traffic and better execution on our part.

For the 12 months ended December 31, we improved our G&A costs as a percentage of revenue by 600 basis points, from 16.2% last year to 10.2% this year, nearly reaching our objective of 9% to 10% of revenues. Our gross margin dollars per closing for the 12 months ended December improved to an average of $39,000, up 5% sequentially, and 11% from a year ago. This improvement is driven by a combination of our expanding margin percentage and our growing ASPs. In fact, looking at just the first quarter instead of the LTM results, our gross margin dollars shot up to $42,000 per closing. That is an improvement of nearly 30% from last year.

As with any report card, there is one subject where we still have room for improvement, and that is our community count, which, as we predicted in November, fell further in the December quarter. This is the result of our decision to limit new investments last year, while we focused on improving performance in our existing assets. With the new capital we raised last summer, we are well on our way to identifying and acquiring communities that will enable us to rebuild community count.

Slide 8 in our earnings presentation contains a lot of information about community counts. In the first quarter, our average active community count was 151, down about 17% from 181 average active communities in the year-ago quarter. We ended the quarter at 150 communities. Over the next few quarters, our handful of new community openings will have to compensate for communities closing out, leading us to expect that our average active selling communities will stay in a range around 150, or nearly 20% below the community counts last year.

With our decided focus on margin improvement this year, we are not going to try and compensate for the reduction in community counts by maximizing absorption rates. That is why we have been so clear about our expectations that orders for the full year will be comparable to last year, in spite of the nice improvement we had in the first quarter. That means, that at this point, we expect orders in the second and third quarters to be below last year.

We know that order growth is important. And as the communities we are acquiring now start to open in the fourth quarter and beyond, we will be well-positioned for order growth in fiscal 2014. In that regard, we doubled land spending this quarter to $90 million compared to $45 million in the fourth quarter, with more than 80% of the land acquisition portion being for communities that are not yet open. With the quality of opportunities we are seeing, we now expect our full-year land and land development spending will exceed $400 million, up about $30 million from the last estimate we provided.

Taken as a whole, I'm very pleased with the results to date of our four path-to-profitability strategies. And I'm confident that our continuous improvement efforts and the renewed momentum in the housing market will help drive our return to profitability.

I would like to end my comments by reminding you of our fiscal-2013 goal. Namely, to deliver adjusted EBITDA of at least $50 million, driven by higher closings resulting from our higher backlog, increases in our ASP, further improvements in our gross margin percentage and dollars, and modest additional leverage of our overhead costs.

Thanks for your attention today. Now let's get to the questions. Operator, if you could open the line, please?

(Operator instructions)

Ivy Zelman, Zelman & Associates.

I love your briefness, Allan, that was great. Very concise, and got all the great information from you. Really seeing the improvement and the strength of your orders. The big question is -- as you're right now replenishing your pipeline, and the market's really improving, what would you say is your biggest challenge in order to achieve what I would call a homerun, hitting top-line growth, margin expansion, leverage on SG&A? What is the opportunity in 2013 that you can hit pretty much a grand slam here?

Ivy, we have taken an intermediate-term view. I don't want to say long term, because that is not how the markets work. But for fiscal '13, we want to improve margins. We want to sustain improved absorption rates. And we want to get fully invested for the recovery. That is going to leave us with some challenges on the order side, as we have talked about last quarter, as we've talked about this quarter. And I think that it would be the definition of a Pyrrhic victory to try and chase orders this year.

I think we may have conditions this Spring that would allow us to chase orders in an amount that would start to offset, if not fully offset, the decline in community count. But that would accelerate the runoff of those communities. I think it would leave margin dollars on the table that we otherwise would like to reclaim. So, while hopefully not lacking in ambition, I would tell you that if we could put runners on second and third this year, I would feel pretty good about that.

That's really helpful. And recognizing that you want to maximize every unit you are selling and get your best return, how should we think about gross margin expansion in the context as, gross margin's going to improve just because of everything that you have been investing, in terms of overall improvement in the operations? How much of your gross margin improvement will be contingent on home price inflation?

That's a great question. And as we look at our forecast, weekly, daily, not quite hourly, it is hard to pull that out. As you are looking at a particular division, or even at a specific community, is the price improvement because of a competitive advantage that we have identified, that we can add a feature or reduce a feature that adds a little margin? Or is it a price change? And is the price change because we are selling more effectively? Or is it because brand X across the street also raised prices? I really wish I had a very scientific way to answer that.

One of the things that I have looked at is, just over the last year, our ASP is up about 4% on a trailing 12-month basis. And that is about $9,000. Our costs are up probably 3% on, call it, $100,000 in direct costs. So, of a $9,000 improvement in sales price, you've got a little over $3,000 in cost creep, which means you ought to have in the $5,000 range drop to the bottom line. And if you look at the fiscal first, calendar fourth quarter, we were up about 3 points in gross margin. And it is clear that that price change contributed a big chunk of that, maybe 2 points.

Now, trying to peel that further down to -- were those price changes driven by just robust market conditions or better selling acumen on our part? I don't know, but I know that both of them are still available to us this year.

That's very helpful. And then an unusual question, just to see if you can provide us some consumer trends that you might be seeing where -- I just read an article in Builder magazine that builders are saying that people want more bedrooms as opposed to a living room and a dining room. What is the consumer want today? Bigger houses? Are they buying more house, and willing to give up space and options and upgrades to have space? Or they want options and upgrades? Give us an update of what you are seeing the consumers want.

And maybe what age cohort is your first-time buyer today? Are they moving up in age [because they've been waiting for] five years?

The answer to the last question is absolutely. The FICO scores and the age of our first-time buyers are definitely older. I don't have a number, but the traffic that we are seeing, and certainly the FICO scores are telling us, we have got a better qualified group of first-time buyers than ever.

At the house level, it's interesting. Our average house size is only up about 50 square feet. We are in the low-2,200 range. So, we have not seen a dramatic change in the consumption of space.

But one of the things that we have been very focused on, and it is a bit esoteric, but one of the things we have really tried to do is to separate the notion of increasing features from the flexibility to allocate the space differently. If you think about structural options, typically what happens is, you can elect to buy a structural option package. And that does typically two different things. One thing, it reallocates the space. It lays out differently. It lives differently. But the other thing that gets embedded in that is feature creep. You've got a gourmet kitchen, you've got bigger cabinets, you've got crown moldings, you've got stainless, and they get combined.

And so, what we've tried to do, market by market, and really community by community, is figure out -- is the buyer in that community more interested in the flexibility of the space allocation? Or is it more important that they can pursue a feature enhancement on a room level? And that separation, I think, is one of the things, rather than saying that consumers are generic and that they want one or the other, I think being able to target different consumers in specific sub-markets, giving them that choice, that is really one of the key operational strategies we have this year.

That's very helpful. Thank you very much, guys.

David Goldberg, UBS.

Just two quick questions here. The first one, I wanted to get an idea, just a sense of how you guys are thinking about your divisional teams and your land teams on the ground now. Are you comfortable with the people you have in place? Obviously, you're putting more capital to work now as we go forward. Are you comfortable with the teams you have? And do you think you're getting good looks at land because of your teams? Or are there places where you think you might need to make some changes?

Great question. One of the things we were asked in a conference recently was about the turnover in our Division President ranks. And a concern was raised about -- well, are these all finance people, are they experienced, do they know their markets? And it caused us -- it was not something I was intuitively concerned about. I know these -- primarily gentlemen, although we have a great lady who runs our Indianapolis business -- and I knew that they had lots of experience. But it was interesting to look at the math. Our Division Presidents average 20 years of experience in homebuilding, and more than 13 years in the market that they're serving as a leader in. Now, that by itself does not tell you anything, other than the fact that these are not a bunch of kids running divisions.

If you look at where we said we wanted to focus our investments, which, we have been pretty clear about California, Florida, Texas, with North Carolina and Arizona being at a tier right below that. And then the Mid-Atlantic, which has been our largest concentration of capital, sustaining that. You really look at the markets, I'll be honest, I am very prideful of the quality of the team that we have and the land departments that we have. And honestly, I think we are seeing first-look opportunities in those markets because of the quality of the team that we have.

Great. And then just my other question, just a quick thought here. Have you guys given any thought to looking at something in the land banking arrangements to try to drive some more throughput? Have you given any more thought to that?

We have. It is something we will consider this year. At present, with a $400 million-ish land spend target, given our liquidity situation, that is very comfortable. We have plenty of cash. We've got cash that's clearly generated from our closings. But I think as we see opportunities that extend beyond that, we would clearly look at it.

And one of the things you have to realize, and I know you do, a land banking relationship changes the margin characteristics of a deal. Each land banking relationship can be a little different, but you are probably talking somewhere 2 to 4 points reduction in margin based on how the land deal is structured. We have got such a strong focus on driving our margin percentage back above 20%, and getting margin dollars per closing back to $50,000 that, that cuts a little bit against the notion of adding a 2 to 4 point tax on very many of our transactions. So, it takes a special deal. And it would take an order of magnitude of spending beyond what we currently see. But I absolutely will tell you, it is something that we are looking at, will consider. We just have to find the circumstances and the deal structure that make sense for us.

Great, thank you.

Dan Oppenheim, Credit Suisse.

I was wondering if you can talk in terms of the improvements, in terms of the sales per community clearly working overall. Then showing the communities where it's still less than one sale per month. It was down to 14% there. Wondering, as you think about, in terms of just the community count issue this year, do you take steps just to bring the remaining ones in line? Clearly, a year ago that meant one per month, more than 50% of the average for a typical community. Whereas now it is less than 40% there, so it is a little bit worse in this improving environment. Do you do more in terms of just trying to get all of the communities doing more in terms of absorption at this point?

It's funny, you could have been listening in on our sales calls, Dan. I am a big believer that to change outcomes and averages, you've got to find the outliers. Make no bones about it -- having one-third of our communities 1.5 years ago dramatically under-performing became the absolute focus. And everybody got tired of hearing me talk about no community left behind. Well, no community left behind resulted in us going from one-third of our communities to 14% in the most recent quarter under-performing. And there is a direct correlation to the improvement in sales per month per community by moving those laggards along.

There is intense focus, attention on a weekly basis on the 4Ps in all of those communities that are still not above the metric that we deem to be performing. I will tell you that I think there is probably some frictional or structural non-performing communities. Is that number 5% or 7%? I don't know.

I have joked a little bit that it is like unemployment. Apparently economists will tell you, if you have an unemployment rate of 3% or 4%, maybe that is the structural unemployment in an economy. I'm not sure that zero is the right target for us. But clearly we can do better than the 14%. I want to drive that below 10%. And a disproportionate amount of our effort is focused on those communities to get to that.

Great. Thanks very much.

(Operator instructions)

Michael Rehaut, JPMC.

Good morning, everyone, nice quarter. First question on the pace versus price, which you have alluded to, Allan. Certainly it appears that 1Q orders were better than guidance or expectations on the sales pace front. And with the comments around, perhaps, not chasing volume, and maximizing gross margins, the thought came to me in terms of the fact that you might -- I don't know what the word is -- cut off your nose to spite your face in terms of maybe limiting sales. But at the same time, you're not going to necessarily be able to raise price or maximize price above where the market bears. And so, therefore, you are not going to get either both the sales or the margins you were hoping for.

So, just trying to get a sense of why necessarily you wouldn't think that sales pace -- you had it up in the quarter, I think, over 50% year over year in the first quarter. It would imply going down below in the teens, I think, to have a negative order growth in the second quarter. And if that is the case, what type of gross margins are you looking for?

This is the hardest part of our business, other than buying land. It's this price/volume trade-off. So, let's talk about a couple of numbers. I'm glad you asked the question because I think the math is actually pretty compelling. In the first quarter last year, our sales per month per community was 1.3. And this year in the first quarter it was 2.1. That is the expansion or the acceleration of sales per month per community. And that growth was enough to offset the decline in community counts from 180 to 150.

But when you look at the second quarter, and we've guided that our community count is going to be around 150, last year it was 188. And last year we did 2.7 sales per month per community in the second quarter. If we did 3 sales per month per community this year, off of a base of 150, we would be down 11% to 12% in orders. So, I am not suggesting that we want to decelerate. But what I don't think we need to do is go figure out what price would get us 4 sales per month per community so that we can print a positive order comp. Is that helpful?

I appreciate that. And maybe just, then, on the gross margins, how are you thinking about -- right now you are at 18.1% before interest, amortization. Where that might end at the end of the year. I know it's talking about specific guidance. Do you think it would drift higher throughout the year?

And also, Bob, if you could give any clarity to the interest expense amortization at $8.5 million in the quarter. When would you expect that to drift down to zero as you build your inventory?

On the margin, Mike, and your question sort of embeds the answer, we don't have a specific margin guidance on a quarterly basis. But I absolutely expect margins to trend up this year. We have been very clear about the fact that we want to get that gross margin, excluding impairments and interest, above 20%. I don't know that we will get there this year, but the trajectory is clearly towards improvement.

And it is house by house, plan by plan, community by community. I joked a couple of quarters ago, people didn't laugh, but I joked about eating the elephant one bite at a time. It is an everyday, every plan kind of thing. I'm confident we have better gross margins ahead of us. And I think that that pattern will continue this year.

I will defer to Bob on the interest.

Good morning, David. On the interest, a couple of things are happening related to that. Interest incurred is down about $15 million annually, or call it $4 million a quarter. We also had over a $40 million increase in inventory. And I would tell you, the composition of that increase is a little bit more heavily weighted to land, which drove the lower interest expense below the line, as well as through cost of sales. I don't think the cost of sales interest ever goes to zero, because you will always [relieve] interest with the assets that you pull through cost of sales.

So, I don't know what the right exact percentage will be, but there will always be interest flowing through cost of sales. I think you'll see -- as we continue to add inventory, you will continue to see the capitalized interest balance continue to grow in relation with that inventory. And I think, even though the expense number dropped, our cap interest as a percentage of capitalizable assets and even total inventory is relatively stable quarter over quarter and from the last quarter.

Mike, and I apologize. Bob called you David. But don't hold it against us.

Mike, I'm sorry.

No problem. My father is David, so --. (laughter)

That's who I was thinking of.

Adam Rudiger, Wells Fargo.

I think the 2013 strategy and plans are clear to us now. So, my question is more around 2014. If you do the things you want to do this year, and you are able to put some capital to work this year, I was wondering how you feel like you will be positioned as you enter calendar 2014? Do you think you will have the assets in place to grow in line or above the overall market at that point?

That is a tough question. I don't know about the overall market. I am confident that we are going to be positioned for great order growth next year, and bottom line improvement next year, building on what we are doing this year. But it is a little premature for me to try and guess how we will perform relative to our peer group. We're clearly not the only ones buying land and opening new communities. I think it is a larger portion of our growth story, perhaps, than others. But market mixes amongst builders also differ.

So, that is a bit of a tricky thing to guess. All I know is that if we make the improvements that we are committed to, and that we have executed on so far this year, the platform we've got to drive growth in '14 is pretty good.

Okay. And then my second question actually relates to your elephant eating. You mentioned, I think earlier, that maybe about 2 percentage points of your gross margin improvement might have been price related. I was wondering what, on the other stuff, the elephant eating, what kind of progress you think you made there and what kind of room you have left. Have you made a big dent in that? Or is it you are still just kind of nibbling?

I think we are still nibbling. I'm very ambitious about that. And every house, every line item is up for discussion. I think the opportunities are so plentiful. It is often little things.

I was in a community not too long ago where, looking at our CMA with the sales team. And this is a very minor issue, but we had a double oven as a standard feature because all of our competitors did. Well, I had been in our competitor communities, and double ovens were an upgrade, they weren't a standard feature. The difference between a double oven and a single oven was about $250. Well, guess what? That's one of my bites of the elephant. That is not a standard feature anymore, that is an upgrade.

So, I'd like to tell you that we have got a laundry list of those things, because we do. And there is still lots of room and opportunity for improvement for us.

Okay, great. Thanks for taking my questions.

I'll now turn it back to your speakers for closing remarks.

Again, I apologize to the group for messing things up this quarter and changing timing. I know there are a lot of other reports that you have got to get to. But thank you for spending a little bit of time with us this morning. And as ever, Bob and Carey and myself are available to answer other questions. Thanks, and we will talk to you in about 90 days.

Thank you for joining today's conference call. You may disconnect your phones at this time.